Question

Tanner, Inc. incurred a financial and taxable loss for 2021. Tanner therefore decided to use the carryback provisions as it had been profitable up to this year. How should the amounts related to the carryback be reported in the 2021 financial statements?

Answer 1

What Is a Loss Carryback?

Loss carryback is an accounting term that describes a situation in which a business experiences a net operating loss and chooses to apply that loss to a prior year's tax return. This results in a lower tax bill for the year to which this "carried back" loss has been applied because it reduces the tax liabilities for that previous year. The loss carryback can generate a tax refund for the business for that previous year because of this newly reduced tax liability. After the carried back loss is applied, it will be as though the business overpaid its taxes for that year. Typically, losses can only be carried back two years prior to the year in which the net operating loss occurred. Special circumstances allow for a three-year loss carryback

Loss carrybacks are similar to loss carryforwards, except companies apply their net operating losses to preceding rather than subsequent years' incomes. Unless certain circumstances are present, a loss carryback can only be applied to the two years preceding the year the net operating loss occurred.

Since Tanner Inc, has incurred a loss in 2021, it can carry back its losses and set them off with profitabilty of the previous year and get a refund. In financial statements of 2021, the losses will be written off to the retained earnings having accumutlaed profit of previous year. In addition to that, the refund would be booked as an asset to be realised in near future against income, just like income tax xpense is booked against liability in case of profitability